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Fitch Ratings Assigns 'BBB+' to Southern Natural Gas Company's Senior Unsecured Notes

Strategic Insights

— 1 min read

Fitch Ratings has assigned a 'BBB+' rating to Southern Natural Gas Company's (SNG) senior unsecured notes, reflecting the low-risk nature of its Federal Energy Regulatory Commission (FERC)-regulated natural gas pipeline system. SNG's ratings are underpinned by strong cash flow characteristics and a credit profile anchored by investment-grade counterparties. The company plans to use the offering proceeds to distribute funds to its owners as repayment for prior capital contributions.

Key Takeaways:

  • SNG's ratings reflect the low-risk nature of its FERC-regulated natural gas pipeline system, with approximately 88% of revenue underpinned by long-term take-or-pay contracts.
  • The pipeline's strong cash flow profile is supported by take-or-pay contracts with investment-grade counterparties, with a weighted average counterparty credit rating of 'BBB+'.
  • SNG's re-contracting risk is considered low, with a remaining weighted average contract life of approximately six years, and most expiring capacity expected to be re-contracted at the FERC-approved rate.
  • The company's closest peer, Sabal Trail Transmission, LLC, maintains a similar financial risk profile to SNG.
  • SNG's EBITDA leverage is expected to temporarily exceed 4.0x during the construction phase of the South System Expansion Four (SSE4) project, before rapidly declining in 2029.
  • The project's completion is crucial for reducing leverage below Fitch's negative sensitivity, and SNG is expected to maintain its approximately current capital structure post-completion.
  • Fitch views Kinder Morgan, Inc. as a strong operator with a solid project execution record, which underpins SNG's ratings.

Statistics:

  • SNG's senior unsecured notes have a 'BBB+' rating.
  • The company's Long-Term Issuer Default Rating (IDR) is 'BBB+' with a Stable Outlook.
  • SNG's EBITDA leverage is expected to temporarily exceed 4.0x during the construction phase of SSE4.
  • The project's cost is estimated at roughly $3 billion.
  • SNG's liquidity is considered adequate, with $29 million in cash and a $75 million unsecured revolver maturing in May 2030.

Sources:

  • Southern Natural Gas Company (SNG)
  • Federal Energy Regulatory Commission (FERC)
  • Southern Company (SO)
  • Kinder Morgan, Inc. (KMI)
  • Sabal Trail Transmission, LLC (Sabal)
  • Fitch Ratings' latest quarterly Global Corporates Macro and Sector Forecasts data file

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